Business Models in Social Networking

 Business Models in Social Networking
Morten Falch, Anders Henten, Reza Tadayoni and Iwona Windekilde
Center for Communication, Media and Information Technologies (CMI)
Aalborg University Copenhagen
Draft paper presented at
CMI International Conference
Social Networking and Communities
26-27 November 2009
Ballerup, Denmark
Abstract
Facebook was launched in 2004, YouTube in 2005, and Twitter in 2006. They are thus very new
service platforms but they already have millions of users and their valuation is counted in billions of
US$. This is an extraordinary development, which one will not find in any other line of business,
and it illustrate the power of network effects, where the utility of the individual users depends on
the presence and usage of the network by other users. The cases described in the present paper are
clearly examples of web 2.0 services, where the services provided by the networks are dependent
upon content created by the users.
The paper is developed as part of the CAMMP project (http://www.cammp.dk) funded by the Danish Advanced
Technology Foundation (Højteknologifonden).
1 Business models in social networking
Morten Falch, Anders Henten, Reza Tadayoni and Iwona Windekilde
Center for Communication, Media and Information Technologies (CMI)
1. Introduction
The aim of this paper is to present a description of the business models of three social networks,
YouTube, Facebook and Twitter, including a description of how they are, or strive at, making
money. Making money is certainly not the aim of all social activities and some social networks
have, indeed, started without any commercial ambitions. At a point of time, however, if a social
network grows beyond its immediate social setting, the issue will be raised how money is to be
made – if not for other purposes then for covering the costs of maintaining and developing the
network.
As mentioned in the Twitter case (section 4), one of the co-founders of Twitter, Ewan Williams, has
been cited for saying that “we’re not worried about monetization, we’re just worried about making a
fantastic product” (Miller, 2009). This resembles statements one could find before the so-called dotcom crash in 2000-2001, which caused business model analysts and developers to give greater
emphasis to how money is actually made instead of just ‘counting eyeballs’. There is, however, an
ongoing discussion on how social networks are and will be making money. One only has to
‘google’ the words ‘social networks’ together with ‘making money’ and a range of websites will
pop up.
An important difference between the pre-dotcom period and now is that the web in the firstmentioned period, to a large extent, was dominated by one-way services, while web 2.0 services - as
first Darcy DiNucci (1999) and later Tim O’Reilly (2005) have termed them - involving user
participation, have presently grown in importance. This will have an influence on the role of
attracting users without having a clear business model to start with. Network effects play a far
greater role in web 2.0 services than in the first generation of web-based services.
The services that this paper is concerned with are clearly web 2.0 services - according to the
O’Reilly definition (2005). Two of them, Facebook and Twitter, are what can be characterized as
social networks. The last one, YouTube, is a video-sharing site, but includes social networking
applications. Other kinds of web 2.0 services include blogs, wikis, folksonomies, etc.
The business model concept used in this paper builds on the basic structure of the business model
ontology developed by Dutch and Belgian researchers, presented, for instance, in one of its early
versions in a paper by Edward Faber et al. (2003). This conception differentiates between four
design elements: Service design, organization design, technology design, and financial design. The
2 sections on the three cases in the present paper use these four design elements as the structure for
the description of the cases. Emphasis in the paper is, however, on the financial aspects and
primarily on the revenue side. How is money actually made: Which are the potential sources of
income?
An important premise is that it is considered as virtually impossible to charge the individual users.
This, of course, depends on the categories of services and of users. Some dating services, for
example, are based on end-user payment. Furthermore, if dealing with business users and social
networks involving business users, there may be greater possibilities for charging a fee for
participating in the network. However, if dealing with residential users, there is a very low - if any
at all - willingness to pay for such communication and interaction services on the Internet. Other
modes of income have to be sought.
As we are dealing with platforms, there are, indeed, other sources of income. The economic
characteristics of platforms are that they coordinate the demands of distinct groups of customers
who are dependent on each other (Hagiu, 2006). All words are important here: Platforms coordinate
the demands of distinct groups of customers who are dependent on each other. There are in other
words indirect network effects between the different groups of users. Dating services are a core
example. However, the three cases that this paper is concerned with are also examples of such
platforms.
YouTube is a video-sharing site where the residential users can hardly be characterized as distinct
groups. But advertisers are distinctly another group and so are application developers. In the case of
Facebook, the great mass of users must likewise, in an economic sense, be understood as one group.
However, application providers are another group. The application developers which are verified by
Facebook pay a fee to Facebook. Furthermore, advertisements are part of Facebook’s business
model. With respect to the Twitter case, application providers are also the second potential group of
users.
If not fully developed yet, a clear development perspective for the social networks in question is to
become two-sided or multi-sided markets/platforms. Other sources of money are, however, also
possible. As at yet, the most important source of funding has hitherto been venture capitalists. They
have put money into these operations based on the expectation that they eventually will be making
money. This has functioned well - especially in a period of economic upturn. It may, however,
become stricter in the coming years because of the present economic crisis.
An additional source of income will come from selling information on the users to advertisers.
There are clearly privacy issues involved. However, information on users and their usage patterns
can be made anonymous and still have great value to advertisers. There are thus different
possibilities, and in the following three sections the actual and potential sources of income will be
described together with a broader presentation of their business models in accordance to the
business ontology presented.
3 2. YouTube
YouTube is an Internet based public video-sharing service, where the end-users upload and share
video clips. On YouTube people can experience varying degrees of engagement: One can chose
only to view the available content, or also to share videos with others and even to develop social
relationships
YouTube was created in mid-February 2005 by three former PayPal employees: Steve Chen, Chad
Hurley and Jawed Karim, and in October 2006 YouTube was acquired by Google Inc for US$ 1.65
billion1.
Google has implemented a sophisticated advertising scheme and revenue sharing mechanisms to
run the YouTube business. These are discussed in the following.
Technical design
YouTube video playback technology is based on Adobe Flash Player and uses the Sorenson Spark
H.263 video codec with pixel dimensions of 320 by 240. This technology allows YouTube to
display videos with quality comparable to more established video playback technologies (i.e.,
Windows Media Player, QuickTime and RealPlayer). YouTube officially accepts uploaded videos
in .WMV, .AVI, .MOV and .MPG formats, which are converted into .FLV (Adobe Flash Video)
(Cheng et al., 2008)
Each YouTube video is accompanied by an HTML markup for embedding it in another page, unless
the uploader chooses to disable this feature. This simple cut-and-paste feature is especially popular
with users of social networking sites, and is also a key to the success of YouTube. (Cheng et al.,
2008)
The video applications prior to YouTube were mainly based on peer-to-peer file sharing
technology. YouTube chose the client-server model, which has been characterized as a step back in
the development (Hoegg et al., 2008). The client-server architecture necessities huge amounts of
investments in server parks and broadband links in a centralistic architecture, which has been
considered being sub-optimal for video/audio sharing compared to peer-to-peer architectures.
In the beginning, the huge investment costs behind the service raised the question of how YouTube
could get a return on the investments. In particular, this became important as the service became
highly popular with huge amounts of upload of video content and because the business model was
not entirely clear. However, the revenue model based on advertising and partner programs seem to
be valid components of YouTube’s business design.
1
http://www.ecommerce-journal.com 4 Service design
YouTube began as a video-sharing platform, but it also offers users a personal profile page - which
YouTube calls a ‘channel page’. This enables people to create friends and to develop social
relationships. A channel page is the YouTube equivalent of what other social networking sites call
‘profile’ pages and includes personal information as well as a list of videos made by the participant,
their subscribers, favorite videos, and subscriptions to other YouTube participants. (Lange, 2007)
YouTube represents a service which is different from other video services and the traditional VoD
systems. Many other video services and VoD systems prior to YouTube were driven by
professional content. The quality and popularity of this content can often be controlled and
predicted, while in YouTube the amount and quality of content are unpredictable and mechanisms
like ‘rating’ are needed to enable users to get familiar with new content. When comparing
traditional VoD services and YouTube, two main issues are mentioned in Zink et al. (2008): 1)
YouTube video contents are uploaded by anyone with access to the network. The content and
quality of these video clips vary vastly. As a consequence, predicting how many new videos will be
uploaded and their popularity within the YouTube community is very hard. 2) The manner in which
content spreads from these two systems to the public is also different. In the VoD system, either the
viewers expect regular updates on the content (in the case of news or TV series) or the content
provider can announce new content (e.g., the upcoming of the latest block buster). In the YouTube
system, it is often the case that a video clip has become extremely popular after viewers became
aware of the clip and told their friends about it, discussed it in blogs, and put embedded links to the
clip on their own web pages.
An important barrier for the development of the service has been the copyright issues, where people
have simply used the platform for uploading copyrighted content without permission of the right
holders. This has resulted in YouTube putting an upper limit of 10 minutes on video content, i.e.,
video content greater than 10 minutes is not allowed on regular the YouTube platform and can only
be accessed as a premium service.
The participation and engagement of the users range from users viewing programs occasionally to
users who are very active in uploading, commenting, rating and developing social relationships in
the YouTube sphere. In a user study of YouTube users in (Lange, 2007) the users are divided into
the following 5 categories:
1. Former participants, who no longer post videos but may maintain an account, watch videos
on the site, and occasionally post a comment.
2. Casual users, who typically do not have an account, tend to view videos when they wish to
search for something specific, when they surf the site, or when someone prompts them with
a link to a particular video.
3. Active participants, who have an account and usually upload videos or at least participate by
leaving comments on other people’s video or channel pages.
5 4. YouTubers or ‘Tubers’, who have a more intense engagement with YouTube in terms of the
amount and type of their participation. They are often on the site daily and certainly weekly,
sometimes for an hour or more per session. Many, although not all YouTubers, promote
their work both within and outside YouTube. They upload videos and closely attend to and
participate in YouTube debates and discussions.
5. YouTube celebrities, who share qualities similar to those of YouTubers. However, they are
also quite well known both within and often outside of the site. YouTube celebrities
influence the discourse, goals, and activities on YouTube through their videos, comments,
bulletins, and other forms of interaction.
All categories of users generate advertising revenues, while as discussed below, category 4 and 5
can also get shares in the generated revenue by going into partnership programs with YouTube.
Organizational design
YouTube is built on user generated content with the end-users acting as producers and consumers of
the content. YouTube does not have any creative and content producing resources and their success
lies in the provision of an easy to use, global platform, where the ordinary users and professionals
upload and share videos with each other.
To create incentives for producers of both user generated content and professional content,
YouTube has developed a partnership program, where the content generators get a share of the
generated revenue. In the beginning, the content generators should contact YouTube to become part
of the program, but in the past years YouTube has chosen a more proactive strategy, where they
contact the popular content generators in order to bring them into the partnership program.
This partnership program may provide the solution to the copyright problem as it generates revenue
to content providers, and professional content rights holders like Hollywood may see the You Tube
platform as an opportunity for distribution of their content. It is not unrealistic that ‘pay for content’
can also be deployed for professional content as a supplementary revenue model for YouTube
alongside with advertising
Financial design
The revenue model is so far based on advertisements. A number of different ways of advertisements
are used in YouTube:

In-video graphical and text advertisements: Around 15 seconds into a video, an 80%
transparent overlay appears in the bottom 20% of the video. If ignored, it disappears after 10
seconds; if clicked, it plays the video ad over the top of the existing clip, then resumes your
original clip when complete2.
2
http://mashable.com 6 
Post-roll advertising: if you don’t click on an overlay ad when it shows up in a clip you’re
watching, the video ad it would have played rolls automatically at the end of your video3.

Pre-roll advertising: Pre-roll ads are short video clips that you must watch before the video.

Regular banners.

Sponsored advertising: Sponsored video spots that works like sponsored advertising on
Google: An advertiser buys a position for specific key words and when somebody types
these key words the advertiser’s video pops up above others with yellow background (again
like Google’s search).
Fred Wilson the principal of ‘Union Square Ventures’ has on http://www.avc.com developed a
simple model to calculate the YouTube’s revenue model.
The model is very simplistic and the values used are not necessarily correct. However, it shows that
because of the huge amounts of the viewers, even when advertisers are charged with a price as low
as 15 US$ per 1,000 views, and even if 65% of this goes to content providers engaged in the
partnership program, there will be more than enough left to cover You Tube’s operating costs.
3. Facebook
Introduction
Facebook was launched by a student, Mark Zuckerberg, at Harvard in February 2004. At the
beginning, Facebook was just a student directory, the goal of which was to provide an important
information and communication services to a pre-existing offline community. In the early days of
Facebook, only users who could verify they had an .edu e-mail address for the college they attended
could register. This restriction was made to ensure trust between the offline community and the
online service created. Since then, Facebook has acquired over 300 million users and is the fourth
largest site in the world after Google, Microsoft and Yahoo sites.
3
http://newteevee.com/2008/10/01/youtube-rolls-out-post-roll-video-ads/
7 Table 1: Worldwide unique visitors (June 2009)
Worldwide unique visitors, June 2009
Google sites
844 million
Microsoft sites
691 million
Yahoo sites
581 million
Facebook sites
340 million
Source: comScore, June 2009
Target group
Facebook provides a social network for all regular PC Internet users and recently also mobile users.
Facebook’s statistics page offers interesting information on user profiles and engagement.
According to the statistics, more than 40 million users update their status every day, and they spend
more than 6 billion minutes on Facebook every day. The average user has 130 friends on the site.
The fastest growing segment is made up of people above 35 years of age. More than 70% of
Facebook’s users are outside the United States4.
Since Facebook has been made available as a mobile service, more than 65 million active users
access Facebook through their mobile devices. This kind of growth has important implications for
infrastructure and for advertisement companies.
The graph below shows that Facebook continues to grow in an extremely rapid pace. In just 14
months, Facebook has grown from 100 million to 300 million users.
4
www.facebook.com 8 Figure 1: Facebook-users growth
Source: Erick Schonfeld, Facebook Is Now the Fourth Largest Site in the World, August 4, 2009
Technology design
Facebook Platform is a standards-based web service with methods for accessing and contributing to
Facebook data5. A key feature which contributes to Facebook’s success is its application platform,
which enables the development of third-party social-networking applications. Facebook has opened
up its core functions to all outside developers on May 24 2007 and already in November 2007,
seven thousand applications had been developed on the Facebook Platform, with another hundred
created every day. By July 2008, the number of applications had grown to 33,000, and the number
of registered developers had exceeded 400,0006. This growth has continued and in November 2009
the number of applications released by third party developers was as high as 350,000. Third party
developers include: Microsoft, Amazon, Slide, RockYou, Box.net, Red Bull, Washington Post,
Project Agape, Prosper, Snapvine, iLike, PicksPal, Digg, Plum and others. More than 250
applications have more than one million monthly active users7.
In order to make the Facebook Platform better for both developers and users, Facebook has
introduced new guidelines that have changed how applications are ranked in the application
directory. Before, the focus was on total number of users, but going forward, user engagement
5
Facebook Platform: http://developers.facebook.com/
6
‘Facebook Expands Power of Platform Across the Web and Around the World’. Facebook, 2008-07-23.
http://www.facebook.com/press/releases.php?p=48242
7
www.facebook.com
9 becomes central. This change has helped drive the growth and distribution of applications which
focus on user engagement and utility.
Service design
Facebook services focus on building online communities that allows people to connect and
communicate with friends. For users, Facebook’s core service is completely free and ad-supported.
Users can upload pictures, create their profile and be friends with other users completely for free.
Facebook provides the user with a choice of who can view their profile. This prevents unauthorized
users from accessing their information.
Facebook provides a variety of ways for users to interact such as e-mail and instant messaging
services. In addition to this, Facebook provides additional features such as the ability to create
groups of users who share common interests, and facilitation of open or closed discussion forums. It
is also possible to upload videos and other content. This can be sent as messages or shared by the
use of the notes application.
One of Facebook’s most popular features has been the ability to upload photos. Users can upload an
unlimited number of photos from their cell phones or through the Java-based web interface, the only
restriction being a 200-photos-per-album limit. Facebook also provides the feature to share the
photos with a simple web link or send them via AIM or by e-mail. Users can also order prints
online through a simple integrated interface. Users can, furthermore, set specific privacy settings for
each of their albums, making them visible only to certain friends. Another important feature is the
Facebook ‘events’ application, which can be used to organize events. This feature has been
extremely successful when it comes to organizing parties. Along with organizing and joining
events, users can also invite and recommend others to an event.
Facebook is, moreover, providing a few mobile options for its users. One of them is mobile web
which is an alternative version of Facebook especially designed for mobile phones. Another option
allows users to upload photos and notes from their mobile phones to Facebook. Users can send and
receive text messages from Facebook friends. Recently, Facebook has implemented Facebook
Connect which is Facebook’s own approach to the single sign-on.
Organisational design
The following actors are involved in the Facebook value chain: Facebook, application developers,
access providers, handsets vendor, operators and users. Facebook is operated and privately owned
by Facebook Inc. Access providers provide Internet and mobile access to Facebook. Users include
private users as well as advertising companies.
An important part of the Facebook platform is services provided by application developers,
particularly by games developers. The value that Facebook offers them is to tailor their applications
for a social networking environment and to make it easy for Facebook users to access various
applications, e.g., to find games and then play with friends.
10 According to Wireless Week, every handset vendor and operator is trying to get deals with
Facebook and other social networks. Handset vendors are important players in the value chain.
According to operators, social networking applications are increasingly driving the growth of the
mobile Internet audience. Therefore, handset manufacturers and operators are racing to be the first
to bring phones with a user interface especially designed for the use of social network services like
Facebook8.
Recently, Facebook and Nokia are in talks about how to embed the social network into Nokia
devices, mentioning the possibility of integrating Facebook contacts and activity with the device’s
phonebook. Even though Facebook already has a mobile site, this partnership would get it installed
onto devices at the factory level, giving the community platform a strong foothold in the mobile
market.
Finance design
a) Revenue
At the beginning, Facebook’s business model was based upon monetizing of the social network that
has been built. The total number of users was more important than interaction between a user and a
brand. As a result Facebook didn’t make enough money from advertising services. Even though
more and more advertisers spend their money on web advertising, only few of them had decided to
invest in Facebook.
This situation has changed in year 2009. Facebook’s management is expecting that revenue will
grow from US$ 280-300 million to US$ 550 million in 2009. This implies a growth of 70% in one
year. Expected sources of revenue are9:




$125 million from brand ads.
$150 million from Facebook’s ad deal with Microsoft.
$75 million from direct sales of virtual goods.
$200 million from self-service ads (mostly from social gaming companies on the platform,
e.g., Zynga, but also ‘performance advertisers’ like online education companies10).
Taking into consideration that Facebook has 300 million users in the world, revenue per user is still
small. In comparison, Google makes 190 times the revenue of Facebook per page view11.
8
Justin Smith, Facebook: Telecoms’ New Best Friend?, February 24th 2009.
9
Marc Andreessen, Facebook board member, July 2009.
10
E.g. online education company University of Phoenix, are finding that ads on Facebook can be targeted so precisely
that they are getting a clear return on investment. The right sorts of people see the ads, click, and sign up for an online
course.
11
Bhavin Turakhia, Google makes 190x the revenue of facebook per pageview, 24 Aug. 2009.
11 From the data presented above, one can see that most advertising revenue comes from ad deal with
Microsoft (beginning of 2009). Microsoft became the exclusive provider of standard banner
advertising on Facebook using Microsoft’s digital advertising solutions and the Microsoft® ad
Center platform in 2007.
During the second half of 2009, Facebook’s revenue has become less dependent on the deal with
Microsoft. Facebook started to make money on its new experimental advertising efforts and through
sales of third-party brands and real-world goods as branded virtual gifts12. So far, companies
offering virtual gifts include: Zynga, American Greetings Interactive, GreetBeatz, Somecards and
Real Gifts, Sephora, Mars, Incorporated as well as 1-800-Flowers.com., Dell, eBay, Bud Light,
Pizza Hut, Target, Dunkin' Donuts, Starbucks. Facebook is also launching a number of branding
gifting campaigns, for example, for the Watchmen movie, Terminator Salvation movie, Britney
Spears13 Circus tour, Budweiser, Johnnie Walker.
The largest Facebook app developer Zynga, which is a social gaming company contributes with as
much as US$ 50 million per year in ad revenue to Facebook. Zynga sells virtual goods (reward
points in Mafia Wars, chips in Poker etc.) to its players for US$ 500,000 a day.
Members of Facebook purchase virtual gifts mostly for self-expression, social status and
communication reasons. Approximately five million virtual goods are exchanged on Facebook
daily, which means that this rare form of advertising is the form of ads that people like to receive. In
comparison to traditional banners, this result is compelling.
According to the Piper Jaffray Report, ‘Social Networking Coming of Age’, the market for paid
virtual goods is estimated at US$ 1.6 billion in 2009 and will be growing to US$ 2.8 billion by
2012.
A new feature implemented in Facebook can increase revenue by allowing advertisers to create,
manage and monitor advertisements themselves. Advertiser can target their audience by choosing
the preferred option regarding age, sex, location, time of the day as well as by language, place of
work, education, status etc.
In addition, Facebook has extended its business opportunities by offering Facebook Ads in 15
currencies. Considering that 70 % of the users are from outside of US, this is important for many
investors.
12
For those campaigns, advertisers only pay for those gifts that are viewed from within Facebook applications. If
someone re-gifts a virtual good or does anything else with it, the advertiser is not charged. Advertisers are currently
running campaigns in which millions of gifts are being sent which means the “Cost Per Gift” advertising model is
already a multi-million dollar business.
13
Brands with major licenses are also now turning to the Gift Shop to offer goods as part of their promotional marketing
efforts, like, e.g., Britney Spears line of virtual gifts.
12 It is expected that most revenue (app. 74%14) will come from local, location-based ads. Local
advertisers have found out that they can bring new customers into their business by targeting people
who live nearby.
It is also expected that Facebook will generate significant revenue through payments or credits
before the end of 2009. Unfortunately, Facebook has not disclosed exact numbers regarding their
prediction of the revenue.
In order to attract larger advertisers, Facebook has partnered with Nielsen15 to gain its credibility
among advertisers. The Nielsen Company will provide information about how web content and
online advertising on Facebook will affect consumer behavior. The management expects that this
collaboration will help reaching the global consumer market through advertisements on Facebook.
According to a new report from Nielsen, year-over-year estimated online advertising spent on the
most popular social network and blogging sites increased 119 percent, from about US$ 49 million
in August 2008 to US$ 108 million in August 2009. In 2009, Facebook became the no.1 social
networking side advertised on by 10 of the top 13 industries ranked by display ad impressions in US
(see table below).
Table 2: Year-over-Year Percent Change in Online Advertising Spend by Industry (US,
August 2009)
Estimated Spend on Top
Social Network Sites*
Industry
Entertainment
Aug-08
Aug-09
$1,097,700 $10,012,800
Year-over-Year
Percent Growth
On Social
Network
Sites*
Social Networking
Site
On
All
Sites
812%
40%
MySpace
Travel
$473,700
$2,198,200
364%
-11%
Facebook
Business to Business
$683,400
$1,941,700
184%
-8%
Facebook
$1,110,200
$3,085,800
178%
-26%
Facebook
Automotive
14
According to a report from Borrell Associates.
15
The Nielsen Company is a global information and media company with leading market positions in marketing and
consumer information, television and other media measurement, online intelligence, mobile measurement, trade shows
and business publications. The privately held company is active in more than 100 countries, with headquarters in New
York, USA. www.nielsen.com.
13 Health
Web Media
$1,131,500
$2,754,900
143%
8%
Facebook
$11,231,800 $26,855,700
139%
30%
Facebook
$526,400
$1,202,500
128%
-29%
Facebook
Financial Services
$3,233,900
$6,415,900
98%
-10%
MySpace
Public Services
$6,836,500 $13,203,100
93%
13%
Facebook
Telecommunications $12,449,500 $23,550,300
89%
-1%
Facebook
Software
Consumer Goods
Hardware &
Electronics
Retail Goods &
Services
$1,913,400
$3,349,200
75%
8%
Facebook
$654,000
$1,022,900
56%
-47%
MySpace
$8,101,400 $12,556,800
55%
-12%
Facebook
Source: Nielsen report, 2009, http://en-us.nielsen.com/
The share of Internet advertising had always been marginally less than advertising spending on
local and national TV. This has changed in favour of Internet for the first time in 2009. According
to the data presented in the report, all industries increase online ad spend on social networking sites
in August 200916.
b) Cost
As Facebook continues to add new members and their associated content, it also needs to expand its
abilities to serve by investing in infrastructure and staff. Facebook users upload more than 2 billion
photos to the site each month and more than 14 million videos17. That will of course drive demand
for more data centre space and more servers.
More data centre space means more cost for the company. Facebook may spend well over US$ 1
million a month on electricity to power its servers and data centre space18. The company has
earmarked US$ 100 million to buy 50,000 servers this year and next.
16
http://en-us.nielsen.com/main/news/news_releases/2009/september/nielsen_reports_17
17
Facebook statistics, 2009; http://www.facebook.com/press/info.php?statistics
18
Rich Miller, Facebook expanding its data centers again, March 30th 2009.
14 Figure 2: Server loans
Source: Niall Kennedy, Facebook's growing infrastructure spend, San Francisco, California,
United States, March 29, 2009
Facebook tries to solve the problem of high infrastructure cost by taking more control over its own
data centres and infrastructure architecture. The company opened up its first data centre in Santa
Clara in January 2009, and an international headquarter in Dublin, Ireland. These investments will
allow for lowering total operating costs per server.
At the same time, Mark Zuckerberg plans to hire more engineers and increase staff by 50%.
Facebook currently has 1,000 employees. People are often the most substantial cost for a company
and even though Facebook tries to reduce its cost, the company still plans to employ more staff.
With growing numbers of employees, Facebook spends at least another few million per month on
payroll.
The question is how much money Facebook will need to invest in the hardware to keep up with
growth particularly in requirements for storage. According to various sources, Facebook has been
buying one NetApp 3070 storage system per week just to keep up with all the user generated
content. At up to US$ 2 million each, that means that they may have spent as much as US$ 30
million only in 200819.
c) Investors
The major resources of Facebook are the servers that keep the site running despite the heavy
amounts of traffic. The growing audience could not be contained without external funding.
Facebook received its first investment of US$ 500,000 in June 2004. Paypal co-founder Peter Thiel,
invested US$ 500,000 to buy servers to help support the rapid growth. Investment data is presented
in the table below.
19
Michael Arrington, Facebook May Be Growing Too Fast. And Hitting The Capital Markets Again, October 31, 2008 15 Table 3: Facebook investment
DATE
TYPE
CAPITAL
AMOUNT
POST-MONEY
VALUATION
INVESTORS
09/2004
Seed
0.5M
Unknown

Peter Thiel
05/2005
Series A
12.7M
Unknown

Accel Partners
04/2006
Series B
27.5M
Unknown

Greylock,
Meritech Capital Partners,
Accel Partners


10/2007
Series C
310M

15000M




03/31/2008 Series C
40M

Unknown

Clarium Capital
Management,
Greylock Partners,
Meritech Capital Partners,
Accel Partners,
Microsoft



05/2008
Debt
05/26/2009 Series D
Microsoft,
Oliver Samwer,
Alexander Samwer,
Ka-Shing Li,
Marc Samwer
100M
Unknown

TriplePoint Capital
200M
10200M

Digital Sky Technologies will
get preferred shares for it’s
200 million
Source: Facebook overview, 09,2009
4. Twitter
Twitter is a social network based on a microblogging platform allowing users to post short
messages and read messages from others. Twitter was founded in March 2006 and was introduced
as a public service in October same year. Users are heavily represented only in a dozen countries
(Krishnamurthy et al., 2008). Twitter is most popular in North America, where 45% of the users are
located (Java et al., 2007). In 2008, Twitter introduced a Japanese version. Tokyo, New York, and
16 San Francisco are the major cities with high adoption rates of users. In the US, the number of
unique users have increased from 475,000 in February 2008 to more than 7 million a year later
(Nielsen, 2008). In spite of this staggering growth, Twitter is still much less widespread than the
most popular US Social network sites Facebook and MySpace.
Technical design
Twitter provides a common platform for sending and receiving messages by the use of a wide range
of delivery channels (figure 3). Twitter can be accessed via an Application Programming Interface
(API) developed by a third party. It is also possible to import an application to Facebook so that
Twitter can be accessed from there. Other access options are instant messaging systems, SMS, or
the web interface provided on http://twitter.com.
Figure 3: twitter input and output methods
Source: Krishnamurthy, Balachander; Gill, Pilipa & Arlit, Martin (2008) A few Chirps About
Twitter. WOSN’08 August 18, 2008, Seattle, Washington, USA.
Service design
The core services offered by Twitter are not very different from those offered on Facebook: Users
can create their own homepage describing their profile. They can read and post messages (tweets),
and they can send messages directly to another user. Posted messages are sent to all ‘followers’, i.e.
those who have chosen to follow a certain user. The concept of followers is different from the
concept of friends used on other social networking sites such as Facebook, Linkedin, and Plaxo.
‘Friends’ indicates a symmetric relationship, while you do not need to follow your followers on
Twitter and vice versa. Furthermore, you can choose to follow any user without his prior
17 acceptance. This implies that some users have many more followers than they follow. For instance
Larry King has 1.3 million followers and follows only 81. Another important feature is that it is
possible to do keyword search in the entire population of tweets. This enables users to see if anyone
has posted something on a particular subject.
As other social networks, Twitter can be accessed on the Internet, but Twitter is deliberately
designed as a mobile service. The formatting requirements for users’ homepages are made in such a
way that they are suitable for access via a mobile phone, and tweets are limited to 140 characters, so
that they can be distributed via SMS.
A hint on the intended value of the Twitter service follows from the preamble on the Twitter
homepage (see below). Here it is described how businesses can use twitter to build a community of
customers and how they can keep them informed about what’s going on in their business. This
preamble is followed by a number of business cases on how private businesses have been successful
in connecting to their customer by the use of twitter.
“Every day, millions of people use Twitter to create, discover and share ideas with others. Now, people are turning to Twitter as an effective way to reach out to businesses, too. From local stores to big brands, and from brick‐and‐mortar to internet‐based or service sector, people are finding great value in the connections they make with businesses on Twitter.” Source: http://business.twitter.com/twitter101 The most well-known delivered value has been the ability to report important news at a faster pace
than any other media. This was for instance the case, when an aircraft landed in the Hudson River,
and when an aircraft crashed in Schiphol Airport in February 2009 (Wikipedia, 2009). Twitter has
also proven to be useful for reporting news from, for instance, Iran.
Organizational design
The following actors are involved in the twitter value chain: Twitter, application developers, access
providers, and users (figure 4).
Figure 4: The twitter value chain
18 Twitter is an independent company. It provides the software for the basic services and operates the
common platform. The system is open and developers have free access to both platform and data,
and several thousand applications have been developed by third parties (Gustin, 2008), for instance
browser plug-ins, photo- and video-sharing applications that enhance mobile and computer based
use.
Users include private consumers as well as businesses using Twitter as a channel for marketing.
Users can be grouped into three different categories:
1. Broadcasters: Those followed by a much larger number of users than the number they
follow.
2. Acquaintances: Those with reciprocity in their relationships, typically online social
networks
3. Users following a much larger number of people than following them.
The first group includes various online radio stations which use Twitter to broadcast the song they
are playing right now, as well as news media and other businesses. The second is by far the largest
group and includes private users. The last group is smaller than the others and includes spammers,
who want contact to as many users as possible.
Financial design
The financial design of the Twitter service is subject to vivid discussion on several blogs. So far the
revenue Twitter is generating for itself is very limited. A little revenue is generated from users
sending and receiving tweets on SMS, but this covers only a small fraction of the costs. Twitter
neither charges subscription fees nor provides space for advertisements. Substantial revenues are
generated by application providers, but in general these revenues are not shared with Twitter. Exec
Tweets Twitter – a site linking to tweets from business executives – shares their revenue with
Twitter, but this is an exception.
Revenues from advertisements or a fee imposed on businesses using Twitter as a marketing
channel are obvious possibilities. There is a risk that especially advertising will reduce the
perceived value of the service and that users will migrate to other platforms. The use of SMS as a
delivery channel puts strict limitations on how to advertise without annoying users. On the other
hand, it is very likely that companies would be willing to pay a fee for using Twitter to stay in
contact with their customers. The focus on this application on the Twitter homepage could indicate
that this option is seriously considered by Twitter. Other suggestions, which have been put forward,
are to offer search engine facilities to companies or to sell the company and its customer base to,
e.g., Google or Yahoo.
However, the company seems to be confident that it will be possible to leverage its huge population
of users at some point of tome. Stone – a co-founder of Twitter has said that they will build the
audience first and the revenue streams later (Gustin, 2008). Ewan Williams – another co-founder –
has the same opinion:”We are not worried about growing users, we’re not worried about
monetization, we’re just worried about making a fantastic product” (Miller, 2009).
19 5. Conclusion
Facebook was launched in 2004, YouTube in 2005, and Twitter in 2006. They are thus very new
service platforms but they already have millions of users and their valuation is counted in billions of
US$. Facebook, for instance, announced – in November 2009 – that they have more than 300
million active users, and YouTube was sold to Google Inc. for US$ 1.65 billion just 1½ year after
having been launched. These are, by any ratings, extraordinary developments, which one will not
find in any other line of business, and they illustrate the power of network effects, where the utility
of the individual users depends on the presence and usage of the network by other users. The cases
described in the present paper are clearly examples of web 2.0 services, where the services provided
by the networks are dependent upon content created by the users.
The three cases, YouTube, Facebook and Twitter, have different profiles and purposes. YouTube is
basically a video-sharing site, while the core service delivered by Facebook and Twitter is social
networking. YouTube, however, also includes social networking applications and there is a
considerable degree of overlap between the different service platforms. Facebook, for example, can
be used for video-sharing just like YouTube. They start out with a more specific purpose but
quickly develop a broader portfolio of applications. Twitter, for instance, is the only one of the three
platforms which included a dedicated mobile platform to begin with, but YouTube and Facebook
have also available on mobile platforms as is the case with many other web-based services.
The paper gives a basic description of the business models of the three platforms, YouTube,
Facebook and Twitter, using a business model framework including service design, organization
design, technology design, and financial design. However, the main question of the paper is how
these networks make money as this is the common issue of many of such networks. Emphasis in the
introduction and conclusion is, therefore, on the revenue part of the financial design aspects.
The basic premise – as it is stated in the introduction – is that it is almost impossible to get people to
pay for access to such service platforms. If a platform starts charging for its services, it is more than
likely that users will migrate to other platforms. The lock-in effect is relatively weak. Although
users spend some time on building their profiles on Facebook, information can relatively easily be
shifted to other platforms. The strongest lock-in effect is related to the network character of these
platforms. Users are attracted because there are other users on these platforms. The network effect
in itself creates a degree of lock-in. However, experience from other temporary network
(quasi)monopolies shows that market dominance, which is almost total, can shift to another
provider in a relatively short while. Even hundreds of millions of users do not guarantee an
everlasting monopoly, which is why these networks expand with complementary services, not only
to increase the utility of the users and to seek new potential revenue possibilities but also to increase
the lock-in effect. Not only direct network effects attract and retain users. There are also indirect
network effects associated with the complementarity of applications.
20 There are, of course, social networks of a more exclusive character, where users can be charged an
access fee. This applies to networks of business users and also applies to networks built up around
very specific areas of interest. In general, however, revenue streams have to come from other
sources. Until now, a major ‘revenue stream’ has been venture capitalists being willing to invest
money in such networks based on the expectation that they, at a point of time, will be profitable
investments. But which are the existing and potential revenue streams which will make these
investments profitable?
Advertisement is the obvious answer, and advertisement is, e.g., the major revenue source for
YouTube and has also started becoming a source of income for Facebook. In the case of Facebook,
however, it is not until 2009 that advertisements have become a revenue source. Furthermore,
Twitter has not yet started exploiting this possibility. There are, indeed, also some limitations of a
technical character for using Twitter as a platform for advertisement, namely the number of possible
characters in a tweet. However, there are potentials to charge business users for the tweets that they
write, calculated on the basis of the number of ‘followers’ they have. And, with Twitter on fixed
Internet, advertisement becomes a stronger potential.
Another possibility is to charge the partners that these networks have: either application developers
or content providers. To the extent that applications and content are used, application developers
and content providers can charge the users and pay a share of this to the social network providers or
the networks can collect the fees and distribute a percentage to the application or content providers.
Facebook, for instances, announces that there are currently more than 350,000 active applications
on the Facebook platform and more than one million developers and entrepreneurs have been
involved. The reality is, however, that these networks make very little money on application
developers. And, in the case of YouTube, it is actually YouTube that pays content providers. This
applies to professional content providers but also to some user generated content. YouTube makes
its money on advertisements and then pays a fee to content providers based on their partnership
program.
Advertisement revenue can be expanded heavily by selling targeted advertisement space. This is a
great opportunity for social networks as they can assemble detailed information on their users: their
profiles and their usage patterns. And not only can they charge advertisers higher fees; they can also
sell the information of a (more or less) anonymous character based on their knowledge on their
users. However, depending on the legislation of different countries, social network providers are
here potentially in conflict with laws on privacy protection.
Further sources of revenue are, in the case of Facebook, the selling of virtual gifts. This is becoming
an important area for Facebook. Also direct contracts with device manufacturers will be
increasingly important. An growing trend is that device manufacturers in the mobile area put
specific applications directly on their terminals, circumventing the mobile network operators in a
‘device centric’ business model. While the traditional business model in the mobile area has been
‘operator centric’ in the sense that network operators have been working (more or less) closely with
device manufacturers, on the one hand, and content and applications providers, on the other, more
21 and more one sees a direct cooperation between device manufacturers and application providers,
including social networks. This, one can witness, for instance, in the case of Facebook.
In summary, the basis of these different streams of revenue is related to the platform character of
the social networks. To a different degree, they constitute multi-sided platforms which coordinate
the demands of distinct groups of customers who are dependent on each other. This includes an
open innovation model, where many of the actual applications on the networks are developed and
provided by external developers. The platform business models constitute a line of business
approaches that one will see to an increasing degree. They release the potentials of the Internet as an
interactive social platform.
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